Warren Buffett & GM’s Bondholders

Warren Buffet is an ardent supporter of the Obama Administration, which seems puzzling given his penchant for the free market and capitalism throughout his life. (Check out Roger Lowenstein’s “Buffett: The Making of an American Capitalist” – definintely a good read…)

Despite his support of the Obama Administration, Buffett spoke candidly about breaking the principles of financial contracts with respect to bondholders. In an interviewed aired this morning on CNBC, Becky Quick asked him about the government’s reach beyond the current General Motors bondholders:

BECKY: There is some talk out there that the bondholders should accept this deal that’s been pushed down. Are you sympathetic to that?

BUFFETT: (Laughs.) Well, I’m sympathetic to both sides on it. I mean, the bondholders want a secure bond. If I have a first mortgage on my house here, and the first mortgage is for half of what the house is worth, and somebody says I want you to take a big haircut because I’ve got credit card debt someplace else, that’s got problems. It has problems in terms of future lending. I mean, if priorities don’t mean anything that’s going to disrupt lending practices in the future. On the other hand, to have a few people standing in the way of something that has, ah, so much importance to the whole country, I can see why people on the other side are very upset. But giving up priorities in lending, abandoning that principle, would have a whole lot of consequences.

BECKY: A whole lot of bad consequences down the road?

BUFFETT: I think it would. If we want to encourage lending in this country, we don’t want to say to somebody who lends and gets a secured position that that secured position doesn’t mean anything. So it’s a tough problem both ways.

For the life of me, I can’t understand Buffet’s public support of the administration despite it’s clear overreach to circumvent basic financial contracts. Would someone please explain this to me?

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